Sordid allegations add to billionaire's woes

Henry T. Nicholas III, already under a legal cloud, is accused of drug use and other excesses.

Riding the high-tech wave of the 1990s, Henry T. Nicholas III became one of the nation's richest people, a brash and innovative billionaire who gave millions to charity and made hundreds of his employees wealthy with stock options.

A decade later, the 47-year-old faces a federal investigation and accusations from a former employee that threaten to tarnish his image as one of the tech industry's leading entrepreneurs and one of Orange County's most generous philanthropists.

Federal authorities are probing Nicholas' role in the manipulation of stock option grants at Broadcom Corp., the Irvine company he co-founded and led until 2003. The inquiry follows an internal company review that found Nicholas bore "significant responsibility" for the so-called backdating of option grants.

In conducting their probe, federal investigators have taken note of a civil suit filed in Los Angeles County Superior Court by Kenji Kato, who worked for Nicholas as an administrative assistant for nearly seven years beginning in 1999.

In court filings, Kato alleged that Nicholas required him to oversee supplies of cocaine and other drugs, pay prostitutes from a "petty cash" fund and conceal his boss' "extracurricular activities," including his alleged drug use, from his wife and others.

Nicholas' lawyer called the allegations "crazy" and contended the civil suit was a $9-million extortion scheme. Los Angeles County sheriff's detectives investigated the extortion allegation and the case was under review by the district attorney, officials said.

Federal prosecutors, meanwhile, were examining the issues in the civil case to determine whether they were relevant to the options case, according to two people with knowledge of the probe who spoke on condition of anonymity because it was an active investigation.

Federal agents this week served subpoenas on several of Nicholas' employees, but not the billionaire himself, according to another person with knowledge of the matter who spoke on condition of anonymity.

The Kato case adds another layer to Nicholas' legal tribulations, which include a divorce case with allegations of drug use against him by his estranged wife, Stacey Nicholas.

Henry Nicholas has denied those allegations, and also denied the claims in Kato's suit.

"These absurd allegations seem to be intended to disrupt the principal focus of my work, post-retirement, which would be in criminal justice and medical research," he said in a statement to The Times.

Nicholas met with The Times at his office in Aliso Viejo on Thursday and again at his $19.5-million home in Newport Coast on Friday, accompanied both times by lawyers and a public relations advisor.

Nicholas said he had been counseled not to discuss the stock options probe or the allegations in the civil suit. But he did say that Kato sank into drug abuse while working for him at Level 7, a music and media company.

"We don't have drug testing," Nicholas said Friday. "We just set the bar so high you have to be sober to meet it. That was too high, unfortunately, for Kenji."

In an interview, Kato attorney Joseph Kar acknowledged that his client had used hard drugs, but said Nicholas introduced him to the practice.

"Before he met Nick, I think the most he had ever done was to smoke marijuana," Kar said.

Kato, 35, was a Pepperdine University graduate student in law and business when Nicholas hired him in 1999. The son of former Oxnard Mayor Tsujio Kato, he met Nicholas through an event-planning business operated by his brother, Dean Kato, according to records and interviews.

"We would entertain him and his guests, by arranging lavish events, dinners, concerts, parties fit for only billionaires," Kenji Kato said in a court filing.

In his lawsuit, Kato alleged that Nicholas and his companies owed him $150,000 in unpaid wages on his $100-an-hour contract -- and that they had later breached an agreement to settle his claims for $3 million.

In subsequent court filings, Kato also alleged that Nicholas secretly spiked the drinks of business associates with drugs, ordered aides to fill balloons with laughing gas to entertain party guests and left drug paraphernalia strewn about a second Newport Coast house owned by Nicholas where Level 7 had a recording studio.

Nicholas also was said by Kato to sometimes stay up for days on end.

"At times, when I was required to stay at Nick's home ... he would wake me up and make me drink and do drugs with him, because that was one of his favorite things to do," Kato said in court papers. His case is pending.

In his statement, Nicholas noted that "during the period of alleged drug use, I received numerous awards for my work in criminal justice from district attorneys and various police organizations."